This study focuses on evaluating (1) the accuracy of the Federal Crop Insurance Corporation's (FCIC's) independent price forecasts, (2) the effect that inaccuracies in these forecasts can have on program costs, and (3) how FCIC can improve its forecast accuracy. We found that FCIC's corn, wheat, and soybeans price forecasts exhibit large bias errors that exceed those of other available alternative forecasts and that FCIC would have spent about $194 million less than it did if it had used the forecasts made by the World Agricultural Outlook Board (WAOB) over crop years 1983 to 1989. We identified other forecasting and program cost issues that we believe affect the actuarial soundness of the program. These include (1) forecasts being made earlier in the crop year than necessary, thus leading to potentially larger errors; (2) the lack of an effective management process to evaluate forecast accuracy and methods; (3) the failure to adjust national program price selection options when information on local price variations can be used; and (4) the failure to deduct harvest costs when total crop losses occur. FCIC is a wholly government-owned corporation offering limited protection for participating farmers against unavoidable losses caused by natural risks, such as drought, flood, insect infestation, and other natural disasters. All farmers are eligible to participate if an insurance program exists for their crop in their county.

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